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Here’s what makes Kotak Realty Fund one of India’s top five realty funds

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India's top five realty funds

By 2005, Srini Sriniwasan had spent 15 years in Kotak Mahindra as an investment banker and, by his own admission, was getting a little bored. Luckily for him, a career change was just around the corner—one that would result in him entering the real estate industry. It was the time the government started opening up the sector to foreign investors and, overnight, Kotak decided to set up the Kotak Realty Fund to tap into the opportunity. “It was a sector crying out to get organised and when the opportunity came, I jumped into it,” says Sriniwasan. “The first thing I did was to hire people who knew something about real estate, i.e. people who knew more than me.”

In the twelve years that Sriniwasan, managing director, Kotak Mahindra Investment Advisors, has run the fund, it has managed to deliver returns that place it among the top five funds in India. This is significant as the vast majority of real estate funds launched in the country have gone belly up.

Along the way, Sriniwasan, 52, has also had a ringside view of how the industry has developed—how various segments like residential, commercial, IT parks, hotels and warehouses have performed. And while he agrees that the era of uniformly high returns in the sector is over, he argues that if you pick your investments well, it is still possible to make handsome returns.

We’re at Sriniwasan’s office at Mumbai’s Bandra Kurla Complex and he wistfully recounts his first few months at the fund. He was thrust into the business and the first thing he did was to get on the ground. His first investment, in 2005, was an 800,000 square feet office park bought from K Raheja Constructions in the Mumbai suburb of Goregaon. This was a time when the outsourcing industry was expanding rapidly and demand for office space was robust. But, unlike other funds that bought completed properties, Sriniwasan took a risk and decided to buy it when it was just a plot of land and a bundle of approvals. He ploughed in Rs 90 crore (plus Rs 120 crore raised from banks) out of the Rs 457 crore that Kotak Realty Fund’s first fund had raised. Over the next five years, the fund constructed the building and leased it.

For any fund manager, the proof of the pudding comes when a sale is made. In 2011, the real estate fund exited the investment for Rs 525 crore with 4.4x returns.

Soon after Sriniwasan made the office park investment, he realised he had to change course. Investing in offices would no longer work. “This was before the 2008 financial crisis and a lot of money was coming into India. Much of it went to office parks and there was to be a glut of supply,” says Sriniwasan. “After doing our first office deal, we did not do another one for seven years.”

It was during this period that Sriniwasan admits that he made an investing mistake, which, till today, is an “albatross around his neck”. In that period, money was flooding into large townships that consisted of apartments, parks, schools, shopping centres etc. These projects had long gestation periods and returns were hard to come by if they were not executed within a specified time frame. The fund made two township investments in Tamil Nadu and the returns were below expectations. This dragged down the returns of the first fund to an IRR (internal rate of return) of 14 percent.

The period post the financial crisis tested Sriniwasan as a fund manager. He’d closed his second and third funds, together totalling $560 million, and had no investible opportunities. “That was when my background as an investment banker came handy,” says Sriniwasan. He understood securities laws and the Foreign Exchange Management Act. By now, the government had allowed foreign money to buy up to $2 billion in debentures. This allowed him to do the first non-convertible debenture (NCD) transaction in Indian realty—he lent the money he’d raised overseas to real estate developers at a time no one was sure it could be done. 

According to Sriniwasan, a PG Wodehouse buff, the spirit of the law was that a developer could not take the foreign exchange risk. So, the fund bringing in foreign money, converting it into rupees, lending it and accepting the returns in rupees should be above board. He completed a deal, with a guaranteed 22 percent return, with Adarsh Developers in Bengaluru without facing any regulatory scrutiny. 

In doing debt deals, Sriniwasan came up with an inviolable principle. Given that contracts are hard to enforce through courts, he ensured that, in a debt deal, he was the only person lending so that if something went wrong he had the first right on assets.

Kotak Mahindra Investment Advisors has managed to raise $400 million from the Abu Dhabi Investment Authority and Qatar’s sovereign wealth fund by deploying this strategy. Kotak Realty Fund’s second and third funds have logged an IRR of 22 percent.

However, this opportunity has also ended. “There are a lot of copycats in the market now and as rates have come down, so have the potential returns,” says Sriniwasan. 

As Sriniwasan enters his twelfth year of managing Kotak’s real estate business, he’s among the few who have seen the market since it was opened up to foreign capital. He’s also traversed the entire route from a shortage of office space to oversupply. 

For now, though, Sriniwasan says the market has come full circle and the office space is showing signs of revival. It usually takes five to seven years to complete an office building; the last set of developments that started after the financial crisis are now complete and rented out. 

Developers have once again started putting money into new office parks and need capital. Sriniwasan, too, is scouting for good deals.
 
The residential market is a different ballgame. It is still plagued with excess supply and Sriniwasan believes it will take a few more years for it to strike a balance. He is hopeful that the recent reduction in interest rates will bring borrowers back. And this is likely to be a more stable demand as years of slow growth in real estate prices have pushed speculators out of the market. 

His advice for end users? Go and buy now. “You’ll never be able to time the bottom of the market,” he cautions.

Source: Forbes India

Ahmedabad Real Estate News

Under Construction Flat Booking Finds Tax Deduction Under Time Constraints

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Tax Deduction

If a buyer makes a transaction to book an under-construction flat and if he acquires it within the three-year period of the sale of his old house, then he is entitled to a tax deduction, says a ruling from the Mumbai bench of the Income-tax Appellate Tribunal (ITAT). If an apartment is booked in an under construction project than it must be viewed as a method of constructing residential tenements, says the December 18 judgment.

That means if the buyer uses the entire gain from the transaction to buy another house within two years or construct another house within three years. The two- and three-year period applies even if the buyer bought another house a year before selling the first one. But the property should have been bought in the name of the seller.

It is mandatory that within a period of two years after or one year before the date of transfer of old house, the taxpayer should construct a residential house or acquire another residential house within a period of three years from the date of transfer of the old house. The date of receipt of compensation will determine the period of acquisition or construction in a case of compulsory acquisition.

This exemption is effective and can only be claimed in respect of one residential house property purchased/constructed in India. In the case of multiple house purchases or constructions, the exemption under section 54 will be available in respect of one house only. Any purchases made outside the country does not fall under any kind of exemption. Section 54 gives relaxation in such cases by providing relief to the taxpayer who sells his residential house and acquires another residential house from the gained capital.

After the sale of an asset, the difference between the buying price and the selling price is a capital gain or a capital loss. These are further classified as long-term or short-term. If a property is held for 24 months or less, with effective from 2017-18, then that asset is treated as Short Term Capital Asset. Then an investor can make

treated as Long Term Capital Asset. Then only a Long Term Capital Gain (LTCG) or Long Term Capital Loss (LTCL) can be made on that investment.

ITAT agreed that booking of a new flat in an under-construction apartment should be considered as a case of “construction” and not “purchase”, hence following the earlier decisions of the Bombay high court and the tribunal itself. Further ITAT allowed the fact that the construction can began prior to the date of sale of the old asset. Same was stated in the earlier judicial decisions of the Karnataka high court and Ahmedabad ITAT, that the date of commencement is not relevant but it is the completion of construction that comes in relevance to section 54.

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India Real Estate News

HDFC and Quikr Make A Deal

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HDFC and Quikr Make A Deal

According to a deal between HDFC and Quikr, a stake of more than 3 percent will be given to the mortgage giant in return to its transfer of offline and online real estate brokerage business to the classified ads platform.

After acquiring Commonfloor in 2016 Quikr already has a major presence in online real estate broking.

“Most of the searches for real estate are moving online. Quikr has a much bigger presence online. Through this deal, we are partnering Quikr in the broking business,” said HDFC MD Renu Sud Karnad. According to her, this deal will strengthen Quirks position with offline support.

The deal suggests that HDFC will transfer to Quikr its entire shareholding in HDFC Realty, a real estate brokerage platform, and HDFC Developers, which runs the HDFC RED online platform.

Karnad added that the deal expects Quikr to generate home loan leads for HDFC. The transaction consists of a co-branded alliance between both parties and the HDFC brand will continue to be used online for a year.

The e-real estate classifieds platform HDFC RED has around 7,000 project listings and generates traffic of over 80,000 unique visitors per month. HDFC Realty has a 300-member, in-house sales team, and 7,000-strong nationwide broker network. Avendus Capital was the exclusive financial adviser to Quikr while Kotak Investment Banking acted as the exclusive financial adviser to HDFC on this.

30 million monthly users make Quikr India’s largest classifieds platform. It runs multiple vertical businesses across real estate, automobiles, jobs, services, and goods. The Quikr Home, its real estate vertical generates 3.5 million monthly unique visitors.

Both companies intend to work closely and conduct analytics and identify potential homebuyers, and therefore home loan customers, early in their home-buying journey. Quikr founder and CEO Pranay Chulet said, “We see great synergies between Quikr and HDFC as we start working together to bring a seamless online-to-offline platform to developers and consumers.”

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India Real Estate News

Retaining The Sustainability: GRIHA Launches Star Rating For Urban Homes

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GRIHA Launches Star Rating For Urban Homes

Green Rating for Integrated Habitat Assessment (GRIHA), is the National Rating System of India, a Sanskrit word meaning – ‘Abode’. Human architecture has always consumed resources in the form of energy, water and material from the environment. From their construction to operation, these habitats absorb the resources throughout their life cycles, emitting wastes in the end. This emission could be direct in the form of municipal wastes or indirect emission into the atmosphere, such as from electricity generation. Hence GRIHA was formed to reduce an architecture’s resource consumption, waste production and overall environment impact up to certain national acceptable limits.

In attempt to quantify all these aspects, like energy consumption, waste generation etc. GRIHA tries to manage, control and bring down the respective to the best possible limit. Being a rating tool, it helps people to assess the performance of their respective projects against the national benchmarks.

Hence it becomes an evaluation of the environmental performance of an architecture on a holistic level. Covering its entire life cycle, this evaluation provides a specific standard for a ‘green building’. This rating system aims to strike a balance between established institutions and emerging concepts, on a national as well as the international level.

The process starts with an online submission of documents according to the criteria. Then a team of professionals and experts from GRIHA Secretariat takes a site visit for the evaluation of the building.  There are four different sections categorized by 34 criteria in GRIHA rating system. Some of them are site selection and site planning, conservation and efficient utilization of resources, building operation and maintenance, and innovation. 

Sanjay Seth, CEO, Green Rating for Integrated Habitat Assessment (GRIHA) Council says, “A rating between one and five stars is being provided, helping the costumers to know about the sustainability of the houses”.

According to the Union Minister, Hardeep Singh Puri, the climate resilient and sustainable buildings are the need of the hour. As the government is aiming to construct around 1.2 crore houses for the urban poor under the affordable housing scheme.

In one of his keynote addresses, Andreas Baum, Ambassador of Switzerland to India and Bhutan said that the Indo Swiss collaboration is operating with the Indian Bureau of Energy Efficiency in the development of guidelines for energy efficient housing.

“At present India is witnessing a rapid urbanisation, if each building becomes greener than the last one, then we have a huge opportunity and hope for our country. We need to look beyond the conventional methods of building, in order to provide our citizens with a good quality of life. Hence, GRIHA gains important in meeting our national goals with respect to a sustainable society”, says Dr Ajay Mathur, director general, TERI & president, GRIHA Council.

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